Who pays the piper?

The insurance aspects of civil litigation have recently come under scrutiny again as part of a general judicial assault on escalating legal costs.

While criticism is mainly centred on the level of after-the-event (ATE) premiums it seems that cheaper options still have no great support from PI lawyers or from the insurance world. With legal services funding (the old legal aid) now very restricted, the obvious and most likely alternative is the much-vaunted "no win, no fee" scheme.

Conditional Fee Agreements (CFA) were originally introduced for a very limited range of proceedings in 1990. Restrictions were lifted in 1999 to extend the scheme to cover most eventualities, except criminal and matrimonial. Regulations controlling CFAs, revised and amended over 15 years, were finally abolished in November 2005 and now control over that funding scheme has passed to the Law Society.

The idea, as hyped, sounds appealing (you only pay if your case is won, otherwise the solicitor works for nothing) and the scheme was initially a huge success. Litigants flooded the courts as a spate of intense clumsiness swept the country.

Local authorities were inundated with claims from people tripping over paving stones or falling off buses and the roads were filled with drivers shunting into each other then diving into the nearest High Street solicitor's office.

Defendent industry rebels
The defendant insurance industry rebelled as small claims reached record numbers and ridiculous figures for costs were sought.

Obviously solicitors had to make enough from the cases they won to cover the possibility of losing some and charging nothing.

Some local authorities, with the full backing of their insurers, deliberately took a stand against the flood and in those areas the accident rates seemed to fall again.

A recent case of a claimant who allegedly tripped over a loose paving stone (but whose injury was actually sustained in a football match) shows how readily the public will jump onto a band wagon and how vigilant insurers have to be.

The original idea behind the CFA concept was access to justice for all but it could not have been anticipated that the scheme would breed such an enthusiasm for litigation. The love of litigation has spread across the Atlantic but has not brought with it the American way of funding.

The US has contingency fees, which allow the lawyers to share in the winnings as their reward for success, thus pushing up the levels of damages to cover those extra costs. Such arrangements are still unlawful in England and Wales. Conditional fees are just what they say on the label: fees which are payable by the client if certain conditions are met. The condition can be outright victory, an honourable draw or whatever the solicitor and client agree between themselves at the outset and record in writing.

Solicitors generally were not enthusiastic about the "no fee" half of the possible equation so tended to claim high enhancements on the costs in winning cases. The courts became involved again, as defendant personal injury insurers mounted numerous challenges to the levels of costs being claimed, and guidelines eventually emerged to curb the excesses.

After-the-event takes off
That is when the demand for ATE insurance really took off and was strengthened further when rule changes allowed reasonable premiums paid for such policies to be recovered from an unsuccessful opponent as part of the costs of the action.

As its name suggests ATE insurance can be taken out to cover costs incurred and to be incurred, even after proceedings have started. Some policies cover own costs only, others protect also against the risk of adverse costs orders.

Premiums quoted and conditions offered in the early days of the scheme were reasonable, almost to the point of generous (if insurers are to be believed) as the companies competed for the potentially lucrative new market.

Once costs claims started rising in number and amount, along with the number of defendants fighting back and winning, the ATE companies had to think again.

Deferred premiums (payable only on conclusion of a successful claim), offered extensively at the beginning as the sprat to catch the mackerel, became increasingly popular with litigants, although increasingly less so for insurers.

Some companies will still offer them, usually on the basis of an interest-bearing loan, but the premium rate runs at about 75% of the anticipated costs and the chances of success need to be better than 60%. With the rapid growth of the CFA concept came an ever-increasing demand for insurance cover to provide additional backing and most solicitors offering CFA work now sensibly insist on cover.

This growth has spread to defamation cases and even to clients "who could otherwise afford to pay" (Campbell v MGN 2005.UKHL 61), bringing more reasons for concern.Lord Justice Brooke, in King v Telegraph Group Ltd (2004. EWCA Civ 613), was clearly of the view that there was a risk of injustice to a defendant if a claimant with a CFA had no ATE insurance to cover an adverse costs order.

ATE insurance is an area which few brokers or insurers cover but many who do are still at the stage where they will negotiate "tailor made" policies for individual cases.

Without a deferred premium, even a case conducted under the magical protection of the new panacea still needs investment from the client. Brokers usually charge an arrangement fee and insurers mostly insist on counsel's opinion on the percentage prospect of success.

Legal expenses insurance is a cheaper option than ATE cover, although there is a limited range available, but is more likely to be geared to businesses than private individuals. After all, nobody in their right mind plans to become a litigant so why insure against the improbable?

There is one source of legal costs funding which is easily accessible and reasonably priced available to the majority of potential litigants It is also the one most frequently overlooked, both by litigants and insurance brokers. This is the legal costs option included in motor and household insurance policies. Some include legal cover automatically, others offer it as a cheap optional extra, requiring no more than a tick in a box and a few more pounds on the premium.

Cover is usually limited to figures in the region of £50,000 but most high street solicitors could take a case a very long way with a pot of that size. These premiums can also be claimed as costs of the action and are so low as to be allowed on court assessment of costs almost without comment.

Most of these policies cover actions as claimant or defendant in areas such as personal injury, employment, neighbour disputes and the like. The insurers must be notified as soon as a claim is intimated and they will want to approve any chosen solicitor, although some insist on instructing their own panel firms.

The best way to deal with possible litigation is to avoid it, or try mediation, but, if the worst happens, all those who smugly realise they have cheap and plentiful cover for reasonable costs can sit back and enjoy the battle. IT

William Gibson is a freelance law costs draftsman